Some Information About PMI
Private Mortgage Insurance (PMI) sounds like a great way to buy a house without having to save for a down payment. Sometimes it is the only option for new homebuyers. However, there are several reasons would-be homeowners should try to avoid paying this insurance.
Cost – Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis.
May not be deductible – As of 2017, private mortgage insurance was tax deductible, but only if the married taxpayer’s adjusted gross income is less than $109,000 per year. This means many dual-income families will be left out in the cold. The ability to deduct PMI is the result of a tax provision that has been expiring and getting extended each year, so in the future, homeowners may not be able to deduct PMI regardless of their AGI.
Giving money away – Homebuyers who put down less than 20% of the sale price will have to pay mortgage insurance until the total equity of the home reaches 20%. This could take years, and it amounts to a lot of money the homeowner is literally giving away.
Hard to cancel – Usually when a homeowner’s equity tops 20%, he or she no longer has to pay PMI. However, eliminating the monthly burden isn’t as easy as just not sending in the payment. Many lenders require the homeowner to draft a letter requesting that the PMI be canceled, as well as receive a formal appraisal of the home prior to its cancelation. All in all, this could take several months depending upon the lender, during which PMI still has to be paid.
How to Avoid Paying Private Mortgage Insurance
In many circumstances PMI can be avoided by using a “piggy-back mortgage”. It works like this: Assume a prospective homeowner wants to purchase a house for $600,000, but he or she only has enough money saved for a 10% down payment (not enough to avoid PMI). By entering into what is known as an 80/10/10agreement, the individual will take out a 1st mortgage totaling 80% of the total value of the property, or $480,000. A second mortgage, referred to as a piggyback, will be taken out for $60,000 (or 10% of the value). Finally, as part of the transaction, the buyer puts down the final 10%, or $60,000. 5% down loans known as 80/15/5 loans are also available in some instances.As long as the 1st mortgage does not exceed 80%, there is no mortgage insurance requiredUS Bank offers this type of financing up to a combined loan amount of $900,000; so a $1,000,000 purchase price with 10% down. Both loans are provided by US Bank.
Information courtesy of Steve Abelman, Executive Mortgage Banker at US Bank